October 19, 2023
A well-circulated joke about technical analysis versus fundamental analysis goes something like this. A technical analyst and a fundamental analyst are in the kitchen discussing markets. One of them accidentally knocks a kitchen knife off the table. It lands right on the fundamental analyst’s foot!
The fundamental analyst yells at the technician, “Why didn’t you catch the knife?”
“You know technicians don’t catch falling knives!” the technician quipped. “Why didn’t you move your foot out of the way?
The fundamental analyst laments, “I didn’t think it could go that low.”
Who uses commodity futures?
People enter futures market positions for different reasons. Hedgers use futures to help avoid adverse price moves. Speculators attempt to profit solely from price moves. Both types of traders aid price determination.
Forces that drive prices vary over time. Sometimes expectations regarding future supply and demand are the strongest futures price-driver. Other times market psychology takes the lead.
Traders use both fundamental and technical analysis to evaluate commodity markets. Fundamental analysts study supply and demand relationships that define the price of a commodity at any given time. Technical analysts use charts and specialized mathematical equations to analyze past price patterns to attempt to predict prices.
Technical and fundamental basics
Technical analysts, also known as chartists, believe the market is 10% logical and 90% psychological. They trade based on anticipating how traders will behave. Of course, charts only tell what traders have done in the past. Chartists hope analyzing previous actions of traders will shed light on what the market is likely to do in the future.
Technical buying and selling often creates self-fulfilling prophecies, which creates opportunities. So, whether you are a technical trader or not, you must be aware of the power and influence of technicians when hedging or speculating in futures markets.
Experience teaches technicians not to buck a trend, but to go along with it. Thus, the saying “Stick with the trend. The trend is your friend.”
Fundamental analysts take the opposite tack, believing that the market is, say, 90% logical and only 10% psychological. Fundamentalists care little about the particular pattern of past price movement. They use supply and demand factors to form opinions about whether a futures contract is fairly valued — and if not, will the price rise or fall?
Cattle market optimism is justified
Ample optimism exists for the cattle market going forward. The national beef cow herd is at a 61-year low. The Livestock Marketing Information Center has beef production declining 5.8% in 2023, another 6.2% in 2024 and another 4.5% in 2025. Consumer beef demand, while below 2021 and 2022 levels, is holding up. The fundamentals are certainly bullish. But what do the technicals say?
Technical analysts use charts to plot price movements. High-low daily bar charts, for example, have a vertical line showing the price range for the day, and a small horizontal tick mark on the right side of the vertical line showing the day’s closing price. Some charts also show a tick on the left side of the line denoting the day’s opening price.
Moving averages are often one of the first indicators that technicians will add to their charts. A moving average is the average price of a futures contract over time. They smooth out market trends and filter out daily fluctuations. Moving averages can serve as measures on their own, or in conjunction with other indicators.
Common moving-average periods are three, nine, 18, 40, 50 or 100 days. They are based on individual preference, and how well those particular averages fit with price action for that commodity.
A simple moving average weights each day equally and is most useful as a long-term indicator. An exponential moving average assigns more influence on recent numbers and less on old data and is most useful as an indicator where short-term price movement is the focus.
Most charting programs and services, such as barchart, provide automatic calculation by selecting a moving average for a price chart.
Finding support and resistance
Analysts often use moving averages to compare the current price level relative to support and resistance on a chart. Technicians typically view the price dipping to a moving average line or rising to a moving average line as a signal that the price movement might stop or retrace at that point. The daily price rising above the moving-average line signals an uptrend. Similarly, the price dipping below the moving-average line points to a downtrend.
Analysts can also visualize short-term and long-term support and resistance on a chart by adding moving average lines of different time periods. The longer the period, the more reliable this indicator may be. Short-term moving averages can give false indications, especially in times of volatile prices. But short-term moving averages can also capture short-lived trends and allow you to capitalize on quick price movements.
Looking at the December 2023 live cattle futures chart, prices dropped below their nine- and 18-day moving averages in late-September and moved below their 40-day moving average in early October. A down trend is in place.
Moving-average crossovers provide more clues
Crossovers occur when the moving-average line for one time period crosses the moving average line for a different time period. Crossovers are used to signal bullish and bearish markets. A short-term moving average crossing above a long-term moving average is generally seen as bullish, and a short-term moving average crossing below a long-term moving average is generally seen as bearish.
On the December 2023 live cattle futures chart, the nine- and 18-day moving averages crossed above the 40-day moving average in early September, which was a sign that the price might continue to move up. A technical trader might use the crossover as a signal to buy contracts.
December 2023 live cattle futures did show strength in September, but stalled in the last half of the month and weakened into October. By mid-October, the nine-day moving average crossed below the 40-day moving average. This may constitute the early signs of a sell signal.
Other common technical analysis techniques include trend lines, channels, cycles, resistance and support planes, corrections, double tops and bottoms and head and shoulders formation.
Recognize limits of technical analysis
Technical analysis gives indicators, not guarantees. To correctly analyze a market, consider both technical and fundamental factors. Remember, no foolproof way exists to predict the future. Accept technical analysis as one more tool for helping to make decisions. It can help identify trends.
However, even the most powerful trending markets can take a bit of a winding road. A trend typically does not go in a straight line. One reason may be profit-taking. Speculators have different trading goals than hedgers. Different traders have different risk and reward profiles. They unwind open positions and take profits at different prices.
Changes in other markets or overall economic conditions can also influence buying and selling in a trending market. For instance, the price of corn influences trading in the feeder cattle futures market. Additionally, day-to-day news can influence buying and selling that goes against the trend.
Schulz is an Extension ag economist with Iowa State University.
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